- The NFIB’s small business optimism index fell 1.6 points to 103.1 in August. The reading came in a touch below market expectations, which called for a smaller pullback to 103.5. Despite easing since mid-2018, the small business optimism index remains well above the historical average.
- Looking beneath the headline print, six of the ten subcomponents fell on the month, three rose and one remained unchanged. The expectations subcomponents led the way in terms of declines, reversing the lofty gains seen in the month prior. Expectations for the economy to improve fell 8 points to 12%, while expectations for higher real sales fell 5 points to 17%. Current inventory and plans to increase inventories also eased on the month.
- On the plus side, earning trends (+3 points to -1%), plans to make capital outlays (+1 point to 28%) and expectations for credit conditions to ease (+2 points to -2%), all improved on the month.
Labor market indicators were mixed. The share of businesses seeing ‘few or no qualified workers’ for their open positions was up one point to 57%, while quality of labor concerns remained top of mind (+1 point to 27%), with both subcomponents setting new record highs in August. Job openings (-4 points to 35%) and hiring plans (-1 point to 20%) fell back, but remain elevated relative to historical norms. The share of firms raising worker compensation retreated on the month (-3 points to 29%), but the share of those ‘planning’ to raise compensation improved (+2 points to 19%).
Key Implications
- Consumer confidence has been running in a serpentine fashion over the last few months, with trade developments a key factor behind this pattern. August saw a major escalation in the U.S.-China trade fight, so the pull back in expectations and confidence wasn’t really a surprise. With negotiations set to restart next month, trade developments are likely to continue swaying optimism among small business owners.
- Today’s report also emphasizes the fact that a lack of qualified workers remains the primary concern among small business, as indicated by the fact that the share of businesses seeing ‘few or no qualified workers’ for their open positions reached a new record high in August. The need for more workers, together with a still-solid confidence (even if edging lower) is sign of the economy’s health. Yet, it is also an indication that the pace of expansion of small businesses may be held back by a tight labor market. With labor in short supply, small businesses will need to shell out more to attract and retain talent.
